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D Fry Market Outlook 10 08 2007

It's the thrill ride that just keeps going! Wednesday we discussed a little about the "bullish bias," but also how markets are dominated today by trading desks and hedge funds. With program trading pushing 40% of trading, these traders go home flat the market each day. So while they were bullish yesterday and riding the trend's wave, today is just another day to trade in the opposite direction.

Hedge funds don't have any bias theoretically. Wall Street trading desks are profit centers, and while they'd like to be supportive to the overall corporate mission [read, ongoing fee income], they're paid bonuses from their desk's profits. So barring a tap on the shoulder from on high they'll trade any which way they want.

Your local trust company or pension plan manager doesn't trade in this type of casino environment, and only a handful of mutual fund companies do. We noted the market's schizoid behavior when, with no subprime/credit market catastrophes, one day markets rally, but breakdown sharply with bad news the next. Thursday was a day for the bears just as bulls were ready to take a victory lap as BNP closed redemptions for three funds. There are additional rumors swirling about the Street regarding several other hedge funds where problems and liquidations may be acute, including at Goldman Sachs Group Inc. (NYSE:GS). [Follow the news at colleague Greg Newton's blog.]

One of the biggest stories of the day is how global central banks are moving to provide liquidity to markets. Talk about a cavalry charge!!! Bears may not be smug for very long, although the markets didn't respond positively even with that knowledge anyway.

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The figures for "up volume" on the NYSE look weird "again," which was a reversal from Wednesday. [Maybe I need a different source.]

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It's said the European Central Bank alone loaned $131 billion to 49 different firms in an attempt to prevent a financial disaster a-la LTCM or worse. The U.S. Fed chucked-in $24 billion, and Bank of Canada is also adding per their statement below.

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Now if this is true, then global paper money supply growth from mostly G-8 countries will expand. [Milton Friedman must be turning in his grave.]

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So, if money supply expands, why would the dollar rally and gold fall? Because in moments of anxiety money gets repatriated fast, causing dollars invested overseas to return. Perhaps the funds are needed to help with bailouts, redemptions and margin calls. And gold investors? They don't know up from down currently.

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A brief tour overseas to BRIC-land.

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Since the Fed's meeting and policy statement, we've been hearing from market pundits that there will be no "Bernanke Put" to correspond to the "Greenspan Put." It's said Bernanke wanted to disabuse investors with the idea that he would bail out investors with "helicopter money." Indeed, Fed Governor Poole was making speeches this week to the effect that borrowers and investors in subprime or risky credit markets are getting what they deserved. But given Paulson's credentials and connections to the Street, he's probably got Bernanke's ear. The printing presses are running and helicopters are flying sorties.

A casino market dominated by trading desks and hedge funds is the market we have. It must be a turn-off for the average investor. I don't watch Crammer [no typo thank you], but I can well imagine some table pounding tirades blaming the Fed for his bad market calls. It's a tough business that way. I wonder if he'll kick his dog when he gets home.

Friday ends another week and which player, bulls or bears, will be holding the hot dice is a crap shoot guess.

Have a pleasant weekend.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in: PowerShares DB US Dollar Index Bearish (NYSEARCA:UDN), streetTRACKS Gold Trust ETF (NYSEARCA:GLD), Financial Select Sector SPDR ETF (NYSEARCA:XLF), streetTRACKS KBW Bank (NYSEARCA:KBE), iShares Dow Jones US Real Estate ETF (NYSEARCA:IYR), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT) and iShares MSCI EAFE Index Fund ETF (NYSEARCA:EFA).